Success does not always breed success. Some pandemic winners rushing to float are grabbing shortlived gains. The initial public offering of Synlab, a laboratories group buoyed by Covid-19 to about €6bn in enterprise value, deserves extra scrutiny. It is backed by Cinven and private equity is adept at juicing pre-float returns. Nevertheless, Synlab has a good investment case.
The company, which is raising €1.48bn in Frankfurt, made more than a fifth of its sales from Covid testing in 2020. It will continue to benefit from this until 2023, says rating agency Fitch. But Synlab will remain well-positioned even after that.
For one thing, lab testing plays an increasingly important part in modern medicine. For another, Synlab can pursue a beneficial acquisition roll-up strategy in a highly fragmented market.
It is the largest pan-European lab group, yet it has less than 3 per cent of the €90bn market in the regions where it operates. That creates scope to consolidate through acquisitions, improving margins through economies of scale. Roll-ups typically come unstuck on big, risk-amplifying takeovers rather than multiple bolt-on deals.
Since 2017, Synlab has made 20 purchases annually, spending €200m a year on average. It can afford to keep up that pace. Its net to ebitda ratio more than halved to 3.3 times in 2020, thanks to divestments and the Covid testing bonanza.
Synlab has punchy, but achievable, midterm growth targets. Annual revenue should rise at approximately 10 per cent, with organic growth of at least 3 per cent. Upgrading pre-pandemic sales figures by a tenth annually, at a target profit margin of 23 per cent, suggests ebitda hitting €630m by 2023. Given the low double-digit share valuation multiples of peers such as Quest of the US and France’s Eurofins, Synlab’s proposed enterprise value of €5.9bn-€6.9bn looks reasonable.
The timing looks auspicious. In the first quarter alone this year, IPOs on the German stock market have raised more than four times as much as in all of 2020. So long as Synlab can convince investors it has a strong post-pandemic future, the float should bring further proof of Frankfurt’s growing vigour.
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